Description

Business Overview

Lightspeed Commerce is one of the largest point-of-sale (“POS”) software providers in the world. They sell the core “ERP” system for SMB retailers and restaurants. Importantly and unlike their competition, they are global with roughly half the business outside the U.S. Thematically this another example of new, cloud provider taking share from legacy, on-premise solutions.

Thesis and Returns

This is a business inflection story where you already have some early datapoints to suggest the inflection is working.

Historically, only 20% of LSPD’s customers also bought Lightspeed payments. The Company is now migrating its existing customer base to payments while also automatically bundling payments into any new sales. This is a gamechanging decision which transforms LSPD from a decent to very good software business. LTV / CAC goes from 2x to 6x and gross profit per customer triples, all with zero incremental cost.

As the payments transition plays out over the next couple years, LSPD should accelerate organic growth while margins go from negative to nicely positive. This is a very attractive setup which is currently masked by macro / rate noise whipping around SMID software.

We think LSPD could 2.5x in 2.5 years valuing it at 25x P/E. This seems reasonable given the company should still be growing revenue 20%+ and EBITDA far faster given margins are far from optimized at this point

Why We Think the Payments Transition Works

1. The transition is better for customers than the current solution

• Integrating software makes the overall product better because it opens up analytics and lending products that are highly valuable
• LSPD Payments are cheaper for 90% of customers and they will price match for the remaining 10% so there’s no additional cost to switch
• LSPD is covering any hardware replacement or technician costs so it costs customers nothing to make the change

2. Software is far stickier than payments

• It is very disruptive to change the core software system and much easier to change payments
• Thematically we’ve seen this play out all over the payments ecosystem as software takes over payments functions and associated profit pools (just look at the legacy acquirers)

3. We have early datapoints that suggest it is working

• LSPD ran a pilot early this year which worked well and gave the team the confidence to roll this out across the company
• Preliminary churn at the first major group of customers, U.S. retail, has been lower than both modeled and the early pilot

Unit Economics of a Customer With and Without Payments

• Note that LSPD reports gross revenue that includes essentially passthrough revenue on payments which is why we focus on gross profit

Risks

1. Business was built through acquisition
   1. Mitigant: mgmt hasn’t done a deal in multiple years and has now consolidated onto 2 platforms, 1 for Retail and 1 for Restaurant, which should allow them to drive more efficient R&D and S&M spend
2. LSPD can’t compete against SQ, TOST, Clover, Shopify
   1. Mitigant: LSPD rarely sees SQ, Clover, or Shopify because they focus on larger, multi-location SMBs who need a more robust solution.
   2. Mitigant: Half of LSPDs business is international where the market is far less competitive and far less penetrated with cloud solutions. This is an incredibly attractive area where LSPD is the clear leader
   3. Mitigant: Only 10% of LSPDs business is U.S. Restaurant which does compete somewhat directly with TOST. This is the only area where we worry about competition
3. Macro is a problem given they focus on Retail and Restaurant
   1. Mitigant: LSPD already incorporated worsening macro into their full year guidance and the payments transition should provide enough idiosyncratic upside to overwhelm any incremental underlying weakness

 I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

• Payment transistion
• Next quarterly earnings report